Posted by forex at 9:36 AM
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1. Use Yahoo Finance advanced graphs (a free service available with any stock you choose to examine in the finance section) of the stock you are interested in buying. Use the exponential graphing option, and enter the 50- and 200-day moving averages. The lines will overlap the graph of prices. Use at least one year of data and choose the volume option. Volume will appear beneath the graph.
2. Take note of the current price. It should be above the 50-day moving average. The 50-day average should be above the 200-day average. All three lines should be upwardly sloping. Note the stock's price action when it falls back to the 50-day moving average. The volume should decline as the stock price falls, and volume should rise as the stock price increases.
3. Trade the stock only when it falls to the 50-day moving average and volume has declined. The trader philosophy should be that the pullback to the 50-day line is normal and that the stock will not fall below the 200-day moving average. At this point, the trader should decide how much risk to take as a percentage of the total portfolio. A recommended value would be not to risk more than 5 percent of available capital. In a $100,000 portfolio, the absolute risk should not exceed $5,000.
4. Risk no more than 10 percent of the $5,000 in the trade. If the value of the stock declines more than $500, then the stock must be sold. This is called a 'stop' and must be adhered to absolutely. Traders must have discipline to take many small losses and avoid major losses. Use the Yahoo tool menu where you choose to create the moving averages and draw the MACD line. When this line turns positive, this will be the signal to buy your stock position.
5. Take your position after the MACD line gives the buy signal, and immediately compute your stop based on the actual purchase price. Follow your trade with end-of-day data. This is not a day trade technique, though it can easily be adapted to one by trial-and-error testing to find appropriate bars representing minutes rather than days. Exit the trade when the stock declines and volume is greater than the prior day (this is called a 'distribution day') or the stock drops below the 50-day moving average.